Scott Newman, broker/owner of Newman Realty.

Love it or hate it, short sales are here to stay. As a buyer’s agent, you owe it to your clients to know the basics of how to effectively work with short sale listings.

Many local Chicagoland neighborhoods are dominated by short sales, with these often misunderstood properties making up for more than 40 percent of the listing inventory.  Why is this important to you?

As an agent, it’s imperative that instead of turning a blind eye to these amazing opportunities for your clients just because they’re a little outside of your comfort zone, you embrace them and learn how to make short sale buyer representation a profitable and enjoyable part of your business plan for 2012 and beyond.

Below, I’ve outlined the most important aspects of a short sale offer so you can best educate your buyer and give yourself the highest chance of having your offer accepted.

Insufficient Earnest Money

While your buyer can certainly offer any amount of earnest money they choose, it is your job to properly advise them so their expectations and understanding of the short sale process will allow them to make the right decision. Of course, it is your goal to protect your client’s best interests by putting up as little earnest money as possible to get the deal done, but it’s important for both you and your client to understand where the other side is coming from.

As a listing agent, I am always adamant about advising my clients to really push for quality earnest money from the buyer. In addition, we always advise them to ask for the entire amount up front upon seller execution rather than breaking it up into installments or having it be due only once the bank approves the short sale. This is to ensure that I have a serious and committed buyer who is going to stick around long enough for the short sale to be approved.  When I see enough earnest money being offered to make me comfortable, it’s been my experience that the odds of that deal closing increase exponentially, which is ultimately what everyone involved in the deal wants.

Respect the wishes and direction of your client, but be sure to discuss the mindset of a seller in foreclosure in an effort to educate your buyer why offering a fair and reasonable amount of earnest money is in everyone’s best interests.

No Skin In The Game

Keep in mind that in many ways a short sale is the same as a normal listing, and significant deviations from widely accepted practices in terms of the offer you submit can greatly affect the chance of it getting accepted.

In a normal transaction, your buyer would be expected to conduct their attorney review and inspection promptly after seller acceptance. However, some buyers are submitting offers where these contingency periods do not even begin until bank acceptance.

While this may be advantageous for your client writing your offer this way puts the seller in a very tough position and significantly weakens your offer.  Think about it; if the seller accepts the offer, they are essentially taking the property off the market for the approximate 30 to 90 day process it usually takes for the bank to make a decision. During that time, the foot traffic will decrease dramatically and potential buyers are moving on to focus on other listings without contracts.

If the bank does eventually accept your client’s offer, the seller is left in a terrible position because the buyer’s attorney can kill the offer for pretty much any reason. In addition, any tiny inspection item that comes up entitles the buyer to walk without penalty.

As a listing agent we always advise our client to request that the buyer conduct their attorney review and inspection immediately upon seller execution as we feel that such an arrangement is the most fair to everyone involved.

The buyer shows their seriousness by conducting the inspection and working through attorney review issues up front so if there are problems that can’t be resolved everyone can walk away without investing much time and effort and additionally the buyer can confirm that the property meets their expectations without having to wait around for weeks or even months to do so.

You ultimately have to respect your client’s wishes but consider talking through the contingency dates with your client in an effort to find a happy medium and increase the odds of your offer being accepted.

Taking Your Time Getting Financing

This is similar to the attorney review/inspection issue above, but it bears repeating.  We always advise our seller to request that the buyer’s mortgage contingency expire no more than 30 days after seller execution. Again, it’s becoming increasingly popular for buyer’s agents to write mortgage contingencies into the offer, which doesn’t even begin until seller acceptance.

This is problematic for both buyer and seller; this practice is bad for your buyer because they should work diligently to secure financing as quickly as possible to make sure there are no underlying or hidden issues, which can cause problems down the road.  It’s also bad for the seller because it puts them in a weak position, as they’re being forced to remove the property from the active market for weeks or months that could have been used ensuring that the buyer does in fact qualify for financing and that the building does as well.

While it is your job to protect your buyer’s best interest, consider debating the merits of changing the terms of your mortgage contingency to more traditional language to give your offer the highest chance of being accepted.

Low-Ball Offers

Banks are very systematic and data-driven creatures and they rarely if ever deviate from that model of operation.

With that in mind, it’s important that both you and your buyer understand pricing expectations prior to even showing up to see a short sale listing.

Banks utilize BPO’s- which stands for broker price opinions- to valuate short sales and those agents who complete them for the banks have some very specific rules they must follow in those reports.

The two most important:

–       BPO agents are allowed to look up to  one radial mile out from the property to find comparables

–       BPO agents are allowed to go back up to three to six months in  time to find comparables

If the price isn’t justifiable with legitimate comparable sales data within those restrictions the odds of your offer being accepted are virtually 0 percent and it’s important for you to effectively communicate that to your buyer up front.

It is important to note that it’s not uncommon for lenders to accept 10 to 15 percent max below median market value on a short sale but going lower is almost never done.  That spread should leave more than enough room for your client to get a great deal and be willing to wait around a little while for the bank to approve the short sale.

While you owe it to your buyer to do everything in your power to get them the lowest price possible it is important to do your due diligence in terms of valuating the asset and making sure your clients understand how banks valuate short sales as doing so will give your offer the best chance of being accepted.

Understanding the Nature of your relationship with the listing agent

Short sales are a totally different type of transaction from either standard or REO listings in many ways and as such the nature of the relationship between buyer and seller’s agent is fundamentally different.

In a normal transaction the seller’s agent is trying to get the highest price in the shortest amount of time and the buyer’s agent is trying to get the lowest price under terms most favorable to their client.

In a short sale this adversarial relationship changes slightly.  As a listing agent on a short sale my job is to get my client’s short sale approved as quickly as possible at a price and terms acceptable to both my client and their lender.  My client is not so much concerned with the final price as they are with getting the short sale approved as quickly as possible.

My main job then becomes finding a buyer that gives my seller the highest likelihood of getting to the closing table as quickly as possible under terms the bank will ultimately accept.  This often results in my advising my seller to accept an offer- in a multiple offer situation- that isn’t necessarily the one with the highest purchase price.

As a short sale buyer’s agent this concept is imperative to your success.  By understanding how to advise your client to write contracts that still meet their expectations and goals while also being cognizant of the unique circumstances surrounding a short sale gives your offer the best chance of being accepted.

In addition, demonstration of your knowledge of the short sale process and conversely how well educated of a client you have goes a long way.  In a situation where two offers are exactly identical I would have no choice but to advise my client to accept the one which I felt had the best chance of closing.  This could mean that being the buyer’s agent who is educated, patient, and who has a client who understand the process well could be the thing that gets your offer accepted over another agent who’s client has made the same offer but who has not demonstrated the same level of competency and education.

Remember, you always must work in the best interests of your client but it’s important to understand the unique nature of a short sale transaction and make sure you and your client’s education and understanding of the process result in an offer being submitted which has the highest chance of being accepted.

Short sales are surrounded by a lot of mystery and confusion and it doesn’t have to be that way.  By taking the time to educate your buyer and yourself and to take just a few moments to get inside the head of a seller going through the short sale process you give yourself the best chance to maximize your ROI as an agent and provide helpful and effective advice to your client to maximize their chance of having their offer accepted.